By Jodi Mardesich
Applications can streamline the way an organization accesses and uses data and information. These applications provide a window not only onto corporate data, but onto the corporation itself, as enterprises use software to link to and create relationships with customers and partners. Ever-present budgetary pressure on CIOs means that wise decisions are called for when it comes to new application projects. The decision whether to build or buy these applications has never been more important.
Buying vs. building applications
Despite the clamor surrounding outsourcing, going offshore for cheap IT labor is not catching on in many organizations. According to a 2004 InfoWorld survey of IT professionals, only 4% of their staffing needs are expected to be handled by offshore labor, compared to 85% through full-time employees, and 11% by U.S.-based contractors.
Outsourcing has one major benefit: lower cost of labor. Outsourced offshore labor costs one-third to one-fifth of what American employees would cost, according to the META Group's Dean Davison. It's no wonder some CIOs are at least dipping their toes in offshore waters.
"Offshore outsourcing provides access to worldwide resources otherwise unavailable to most enterprises," said Davison. And when application development and maintenance constitutes approximately 30% of spending for the average IT organization, it can add up. "However, while outsourcing can cut costs, it adds risks and challenges," he says.
For example, companies turning to other countries must decide how far they can go without risking security breaches, or operational breakdowns, when moving work thousands of miles away. A rigorously enforced security policy is a must, experts say.
"It would always be more beneficial to have trusted resources handling any project that involves sensitive information or applications," says Lee Kushner, president of LJ Kushner & Associates. That's why building a well-trained, company-savvy, efficient in-house development team can prove more strategic.
Building considerations
The question of whether to buy or build applications is complex: CIOs must weigh several factors, such as need, cost, time to market, and available in-house resources.
If a product exists that meets a company's requirements, it doesn't make sense to reinvent the wheel. Software applications exist that allow banks to give customers access to their accounts, for example, or for retailers to bill their customers. But if an application need is inherently unique to the enterprise, such as proprietary authorization for a credit card company, in-house development makes sense.
"There's no one answer to this question," says Joshua Greenbaum, principal with Enterprise Applications Consulting. "It's a very customer-, industry- and case-specific question. Economically, it's always better to buy a packaged product if one is available. In the absence of a packaged product, you have to build."
Factoring the Cost: According to the META Group, IT staff salaries will increase by as much as 10% to 15% over the next three years, driving up labor costs and taking up a greater percentage -- as much as 55% or more -- of IT's budget. Before CIOs opt for in-house application development, they must also consider the cost of education and training for staff that needs to be retrained to be qualified for the job.
"Another issue to consider, especially when building a custom in-house application, is who will maintain it? And who is going to upgrade it? When buying packaged software, there are user groups and other sources to tap into when help is needed," Greenbaum says. "With a home-grown application, that's not the case. Maintenance and upgrade costs must be factored in when determining the cost of building vs. buying an application."
Using available resources: CIOs should take stock of what's on hand, including both software and personnel. Can existing resources be used? Rather than buying new software, is it possible to build an interface to existing software to leverage the company's legacy systems or applications?
"Building customized solutions requires a great deal of time, as well as both skilled and dedicated resources," says Ron Exler, director of channels and marketing for the Robert Francis Group. CIOs should take an inventory of their resources, including applications, development tools, and personnel skills, and make the best use of those resources. "IT executives should also consider hiring outside consultants to help perform the work, as long as the project is managed internally and there is a mechanism in place for skills transfer," Exler says.
Building an in-house team that can work on projects as-needed has its advantages: it can improve projects' time-to-market, it can protect corporate assets, and it can engender loyalty among employees.
Speedier time-to-market: In-house development can save on time. A team of outside consultants must become familiar with the company, its products, and goals. Often, consultants can make false starts -- making the same mistakes the company has already made. Using in-house developers eliminates hours needed to get outsiders up to speed.
Protecting corporate assets: Some applications are too sensitive to trust to outsiders, especially applications related to security. "Outsourcing of any technology function leads to many possible information security issues and concerns," says Kushner. "It is important that organizations take the proper precautions on any work that they outsource to third parties, whether domestically or internationally."
"Data security can be a problem, because overseas countries have different practices and laws than the U.S.," Exler says. "Some have stronger laws but many have more lax practices. This can make proper testing a problem. However, if IT does not have a good track record developing secure applications then it may make sense to outsource those anyway. IT needs to be sure security is addressed in outsourcing contracts to help mitigate that risk."
Gaining loyalty: A good IT staff is worth its weight in gold. Once a CIO finds engineers, project managers, and Web designers with the right skills, he or she should work to keep them. Hiring from without is expensive, and hiring consultants even more so. By taking that money and investing it in current staff, CIOs can give them opportunities to advance. By offering education and new experiences, staff can rise to meet new challenges. And in the process, they value their employment more.
"When building a team, look for people with appropriate programming experience, depending on the platforms and applications already being used in-house; interface experts who have done application integration work, people who can build Web-centric applications, and people with legacy system skills," Greenbaum says.
Jodi Mardesich writes about business and is a former staff writer for Fortune.